Oracle Blog

by Sin-Yaw Wang

QDII Explained

I asked LI Fang to figure out what is QDII. She turned in the homework few days later. I would give her an A if it is a school project (then again, most employees in ERI were excellent students).

In April 2006 China's central bank & SAFE (State Administration of Foreign Exchange) jointly released rules to allow Qualified Banks, Insurers & Fund Management companies to buy foreign currencies
to invest overseas. This is viewed as a signal of the beginning of long-waited QDII scheme, a big step taken by Chinese government to reform China's capital account & to further integrate China's capital market into global platform. However, no specific date for QDII scheme rules comes out.

QDII is an interim solution for those countries allow domestic investors to invest offshore with purchased foreign currencies. China's QDII was first initiated by Hong Kong Government.

It basically allows China's banks to invest abroad by relaxing controls on domestic firms and individuals buying foreign exchange. The new QDII policy also allows insurance company to invest in foreign fixed-income assets & money market paper. This will allow more outflows of foreign currency & decrease upward pressure on RMB, with a background that China's foreign reserves stood at US$853.6 billion (as of February 2006), surpassed Japan as the world's largest.

China is taking one more step to open itself up. This time, the long tightly control foreign exchange. The unavoidable steps following are market-based currency exchange and loosening of capital exchanges across the border. Both will lead to increased trade and investment activities.